Companies with 10+ employees must be covered. Use 15/26 formula if covered, 15/30 if not.
Calculation Breakdown
Gratuity Formula — Payment of Gratuity Act 1972
The gratuity formula differs based on whether the employer is covered under the Payment of Gratuity Act:
- The factor 15/26 represents 15 days' pay per year of service, with 26 as working days in a month
- If service exceeds 6 months in the last year (e.g., 10 years 7 months), it rounds up to 11 years
- If service is 6 months or less in the last year, it rounds down (10 years 5 months = 10 years)
- Maximum statutory gratuity payable is ₹20,00,000 (revised ceiling)
Gratuity at Different Service Periods
| Years of Service | Gratuity Amount | Tax-Exempt Amount | Taxable Amount |
|---|
Frequently Asked Questions
Yes. Gratuity is typically included in the CTC (Cost to Company) as a provisioned expense at 4.81% of Basic Salary (this is the theoretical calculation: 15/26 × 1/12 of monthly basic ≈ 4.81%). However, it is actually payable to you only on leaving the organization after 5+ years of service. Including gratuity in CTC is legal and common — but remember, you only receive this amount after completing 5 years with the company.
If you resign before completing 5 continuous years of service, you are legally not entitled to gratuity under the Payment of Gratuity Act 1972. However, some employers voluntarily pay ex-gratia (goodwill) payment for services of 3-4 years. Exceptions where gratuity is payable even below 5 years: (1) death of the employee — nominee receives gratuity for any duration, (2) permanent total disability — gratuity is payable regardless of service duration.
Yes. The Payment of Gratuity Act sets the minimum gratuity payable. Employers can and often do offer higher gratuity based on their employment agreements or company policy. The tax exemption, however, is capped at ₹20,00,000 — any amount above this (whether statutory or ex-gratia) is taxable. MNCs and senior executives often negotiate higher gratuity formulas in their employment contracts.
Gratuity is not considered for EPF/PF computation — provident fund is calculated only on Basic + DA, not on gratuity. For income tax: Government employees receive 100% tax exemption on all gratuity received. Private employees covered under the Gratuity Act are exempt up to ₹20,00,000 (minimum of actual, statutory calculation, and ₹20L ceiling). Non-Act covered employees can claim exemption up to ₹10L under Section 10(10)(iii).